Blue-chip stocks are typically issued by mature companies that have achieved (or are close to) their maximum growth potential. Given that such companies have limited growth potential and that their stocks are typically expensive, many people wonder if they can make money with blue-chip stocks. If that’s crossed your mind, this post is meant for you.
You can make money with blue-chip stocks through dividend payouts. These stocks pay dividends consistently, providing investors with stable income streams. They’re also liquid and low risk, making them ideal for a buy-and-hold investment strategy.
Read on for more information as I delve deeper into why you can make money with blue-chip stocks and provide actionable tips on how to invest in them.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
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How Is It Possible To Make Money With Blue Chip Stocks?
The reason it’s possible to make money with blue-chip stocks is a function of three traits:
- Blue-chip stocks have high, consistent dividend yields.
- Blue-chip stocks are low-risk investments.
- Blue-chip stocks are highly liquid.
Let’s discuss each of these statements in greater detail below.
Blue Chips Stocks Have Higher Than Average Dividends
Dividends are one of the primary sources of income for any stock investor. So when we talk about the potential for making money with any stock, we must look at its dividend yield.
The reason blue-chip stocks have higher than average dividend yields has a lot to do with the nature of the underlying companies. Typically, blue-chip stocks are issued by established companies. Think big names like Coca-Cola, Walmart, Disney, IBM, PepsiCo, General Electric, and other industry giants.
Companies of this caliber sell high-quality, high-demand products and services and enjoy economies of scale. They also tend to have well-structured management teams at all levels. That, among other reasons, is why they’re able to ride out market downturns and remain profitable even in adverse economic conditions to maintain stable, reliable growth.
Note that I didn’t describe their growth as fast because most blue chips have reached maturity and grow at a slower (but more steady rate) than companies that issue growth stocks.
Generally, mature companies pay more regular dividends than their younger counterparts. They also tend to pay out a bigger chunk of their profits to investors than younger companies that would rather reinvest their earnings to facilitate growth. That’s why the S&P 500 Dividend Aristocrat list comprises companies that have hit the maturity growth stage.
If you take a closer look at the dividend aristocrat list, you’ll notice that they’re pretty much what I’ve described above in terms of growth stage, dividend yield, and the consistency of dividend payouts. They’re all mature companies that have paid dividends consistently for the last 25 years. What’s more, their dividend yields have been rising steadily throughout that period.
Blue Chip Stocks Are Low-Risk Investments
Generally, low-risk stocks aren’t the best way to make money. That’s because their low volatility means there’s less chance of spontaneous spikes in stock prices that you can leverage to make a huge profit.
Of course, the positive side of low-risk stocks is that you’re less likely to lose your money. As much as their high-risk counterparts give you a better chance of making larger profits due to sudden upsurges in stock prices, there’s an equal chance of incurring huge losses when prices go the other way.
So then, how come being low-risk is positive when we talk about blue-chip stocks’ potential to make you money?
Let me explain.
When you invest in blue-chip stocks, you’re more of a buy-and-hold investor. That strategy is different from stock trading and day trading, where investors buy stocks and sell them within a short period to capitalize on short-term price fluctuations. As an FYI, the latter type of investors is usually exposed to more risk than their buy and hold counterparts.
Buy and hold is more focused on the long term than the short term. When you adopt this strategy, you want to acquire stocks of companies with great long-term prospects. Predictability is also a crucial consideration because you’re holding these stocks for a long time, hoping that they’ll increase in value over that period. Afterward, you can sell them for a profit.
Blue-chip stocks are perfect for this investment strategy.
Their underlying companies typically have predictable outlooks because they have a proven track record of success. And while their stock prices may not rise sporadically in the short run, the growth is usually slow but sure if you look at the bigger picture. Add to that their low-risk profile, and you have the perfect stocks for any buy-and-hold investor.
What does all this mean for an investor looking to make money? Simple: It means you can buy and hold, enjoy consistent dividends throughout the holding period, and be almost sure to eventually sell at a higher price thanks to the limited volatility.
There’s also the fact that buy-and-hold investors tend to pay less in short-term capital gains taxes and transaction fees. So you not only have two ways to potentially make decent money (depending on the size of your investment), but you also get to cut down on taxes and transaction fees.
Blue Chip Stocks Are Highly Liquid
Liquidity plays a critical role in blue-chip stocks’ potential to make you money. It ensures that you won’t struggle to find buyers when you eventually decide to sell your stocks for a profit. Remember, you can’t buy and hold forever; you’ll need to sell at some point, and you want to be able to quickly convert your stocks into cash when that time comes.
Why are blue-chip stocks highly liquid?
Again, it all comes down to the nature of the underlying companies. Blue-chip companies boast institutional status and impressive balance sheet fundamentals, making them attractive to investors. Their stocks are also frequently traded on the market by both institutions and individual investors.
Combined, these traits mean that you’ll have a ready buyer on the other end of the transaction when you need to convert your blue-chip stocks to cash.
How To Invest in Blue Chip Stocks?
One of the golden rules of investing in blue-chip stocks is to think long-term. Since the underlying companies grow slower than relatively younger organizations, the best way to take advantage of their success is to hold their stocks for at least seven years.
This way, you can enjoy their dividend payouts for a longer period and give the stocks enough time to appreciate and provide a large profit margin when you decide to sell.
Also, complement blue-chip stocks with other holdings in your portfolio for the sake of diversification. Depending on your investment goals and risk appetite, you might want to couple these stocks with cash, bonds, or even mutual funds. The key is to give your portfolio some exposure to investments with a greater upside potential than blue-chip stocks while maintaining your desired risk profile.
Last but equally important, pick the right blue chips to invest in because different companies perform differently even when they’re in the same growth stage. Specifically, get a copy of each prospective company’s historical financial reports and compare the dividend yields, earnings growth, bond credit rating, and interest coverage ratio. If you don’t understand what these terms mean, consult with a professional.
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Conclusion
Before I wind up today’s post, there are two things I’d like to emphasize as far as investing in blue-chip stocks is concerned. First off, be careful when choosing the companies to invest in because performance varies from one blue-chip to another.
Second, adopt a long-term investment strategy, ideally one spanning over seven years. And as always, be sure to keep a diversified portfolio by complementing blue-chip stocks with other investments. Cheers!
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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